The Russell 2000 (^RUT) is packed with potential breakout stocks, thanks to its focus on smaller companies with high growth potential. However, smaller size also means these businesses often lack the resilience and financial flexibility of large-cap firms, making careful selection crucial.
The high-risk, high-reward nature of the Russell 2000 makes stock selection critical, and we’re here to guide you toward the right ones. That said, here is one Russell 2000 stock that could be the next big thing and two that may struggle to keep up.
Two Stocks to Sell:
Photronics (PLAB)
Market Cap: $2.01 billion
Sporting a global footprint of facilities, Photronics (NASDAQ: PLAB) is a manufacturer of photomasks, templates used to transfer patterns onto semiconductor wafers.
Why Does PLAB Worry Us?
- Annual sales declines of 1.4% for the past two years show its products and services struggled to connect with the market during this cycle
- Anticipated sales growth of 1.6% for the next year implies demand will be shaky
- Competitive supply chain dynamics and steep production costs are reflected in its low gross margin of 35%
Photronics is trading at $34.31 per share, or 28.6x forward P/E. Check out our free in-depth research report to learn more about why PLAB doesn’t pass our bar.
Arbor Realty Trust (ABR)
Market Cap: $1.08 billion
With roots dating back to 2003 and a focus on the stability of multifamily housing, Arbor Realty Trust (NYSE: ABR) is a specialized lender that provides financing solutions for multifamily and commercial real estate while also originating and servicing government-backed mortgage loans.
Why Do We Pass on ABR?
- Annual net interest income growth of 4.3% over the last five years was below our standards for the banking sector
- Earnings per share decreased by more than its revenue over the last five years, showing each sale was less profitable
- Annual tangible book value per share declines of 5.6% for the past two years show its capital management struggled during this cycle
Arbor Realty Trust’s stock price of $5.61 implies a valuation ratio of 0.5x forward P/B. To fully understand why you should be careful with ABR, check out our full research report (it’s free).
One Stock to Buy:
Planet Labs (PL)
Market Cap: $18.32 billion
Pioneering the concept of "agile aerospace" with hundreds of small but powerful satellites, Planet Labs (NYSE: PL) operates the world's largest fleet of Earth observation satellites, capturing daily images of our planet to provide insights on deforestation, agriculture, and climate change.
Why Are We Bullish on PL?
- Sales pipeline is in good shape as its backlog averaged 157% growth over the past two years
- Additional sales over the last two years increased its profitability as the 65.4% annual growth in its earnings per share outpaced its revenue
- Free cash flow flipped to positive over the last five years, indicating the company has passed a significant test
At $51.78 per share, Planet Labs trades at 2,069.6x forward EV-to-EBITDA. Is now the right time to buy? See for yourself in our full research report, it’s free.
Stocks We Like Even More
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